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Japan's Mitsubishi UFJ agrees to help Morgan Stanley

Text by AFP

Latest update : 2008-12-10

After lengthy negotiations, Japan's largest bank, Mitsubishi UFJ, has agreed to buy 20% of Morgan Stanley and inject 9 billion dollars into the troubled Wall Street investment bank.

Mitsubishi UFJ Financial Group, Japan's largest financial group, secured a sweeter deal to invest 9.0 billion dollars in Morgan Stanley on Monday, giving a vital boost to confidence in the ailing US bank.

Shares in Morgan Stanley soared 48.4 percent to 14.37 dollars in early trading as US markets bounced back after a weekend of talks among world economic powers on how to save the financial system from meltdown.

Last week, rumors that the Japanese group would pull out of the deal, first announced in September, sent shares in Morgan Stanley into a tailspin and raised fear of another high-profile Wall Street collapse.

The terms announced Monday were improved for MUFJ compared with those initially agreed, reflecting the more than 50-percent fall in Morgan Stanley's share price since the original deal was announced.

"Today's investment further bolsters our strong capital position and, together with our strategic alliance, will accelerate our transition under our new bank holding company structure," Morgan Stanley chief executive John Mack said in a statement.

Under the deal, Mitsubishi, the world's second biggest bank by deposits, gets a 21 percent stake by acquiring preferred shares in Morgan Stanley whereas the initial deal was based on three billion dollars of common and six billion of preferred stock.

Preferred shares usually offer holders better or more secure terms, such as on dividend payments, compared with common shares.

Morgan Stanley, whose market value at Friday's closing price was about 11 billion dollars, is one of only two Wall Street investment banks left after the financial turmoil that has claimed Bear Stearns and Lehman Brothers.

The group turned itself into a holding company at the end of September, meaning it can accept ordinary saving deposits and is now subject to government insurance and tighter regulation.

The tie-up is a boost to confidence for the financial system by showing that private sector deals in the banking sector can work at a time of widespread government intervention in the markets.

"Despite a very challenging environment, MUFG and Morgan Stanley have demonstrated our mutual commitment to this strategic alliance and have revised the terms of our investment," said MUFG chief executive Nobuo Kuroyanagi.

An analyst at the Jefferies brokerage, Art Hogan, said the deal was helping to lift the market generally by removing a doubt about another large bank failure.

"Morgan Stanley is going to be protected, that's lifting the markets," he said.

"The numbers are supportive. If you look at what Mitsubishi is getting for the price they pay, it's a good deal for both parts."

The US Treasury and European governments have agreed to invest directly in their banks, which are in desperate need of capital to continue lending but are struggling to find willing private investors.

Shares of Morgan Stanley fell sharply last week during one of the worst trading weeks ever in Wall Street history.

The pressure on Morgan Stanley stemmed from uncertainty about its exposure to soured investments, particularly complicated securities called credit default swaps which insure buyers against default.

Rating agency Moody's repeated a warning Monday that it might lower its main debt ratings for Morgan Stanley because of fears about the outlook for the bank because of the financial crisis.

It said an extended downturn in global capital markets would hurt the company's revenue and profits in 2009.

The deal for MUFG to buy its stake received the greenlight from US federal authorities a week ago.

Date created : 2008-10-13